Fraud, People and the ‘Jammy Pants Audit’: Implications for Auditing Regulators and Firms

Abstract

In this commentary, I discuss a potentially troubling divide between human-focused fraud research on one hand and audit regulation and practice on the other hand. Fraud research increasingly highlights the human element of fraud and emphasizes knowing and assessing people as keys to understanding and mitigating fraud risk. By contrast, auditing standards continue to be based on the traditional fraud triangle, which largely ignores people. Further, audit practice has shifted markedly toward what I call the ‘jammy pants audit’, where many auditors work remotely, interacting with client personnel on a very limited basis. Thus, fraud research is emphasizing people, while auditing regulators and audit practice are not. Based on the analysis, I offer implications for auditing regulators and firms as well as related future research opportunities. Ultimately, a significant part of auditing is determining if management assertions are credible. It is more difficult to make that determination and to fully assess fraud risk if you do not know much about the people behind the assertions and the numbers.